who cares wins — connecting financial markets to a changing world (june 2004)

8/14/2019 Who Cares Wins Connecting Financial Markets to a Changing World (June 2004)

1/58

Who Cares WinsWho Cao Ca ress Winn sConnecting Financial Markets

to a Changing World

Recommendations to better integrate environmental, social and governanceissues in financial analysis, asset management and securities brokerage

Recommendations by the financial industry to better integrate environmental,social and governance issues in analysis, asset management and securities brokerage

Endorsed by:ABN Amro Aviva AXA Group Banco do Brasil Bank Sarasin BNP Paribas Calvert Group CNP Assurances

Credit Suisse Group Deutsche Bank Goldman Sachs Henderson Global Investors HSBC IFC Innovest

The GlobalCompact

ISIS Asset Management KLP Insurance Mitsui Sumitomo Insurance Morgan Stanley RCM UBS Westpac World Bank Group


2/58

Who Cares Wins

Connecting Financial Marketsto a Changing World

Recommendations by the financial industry to better integrateenvironmental, social and governance issues in analysis, asset

management and securities brokerage

The GlobalCompact

United NationsSwiss Federal Departmentof Foreign Affairs


3/58

Financial Sector Initiative

Who Cares Wins

Endorsing institutions

The report is the result of a joint initiativeof the following companies:

ABN Amro

Aviva

AXA Group

Banco do Brasil

Bank Sarasin

BNP Paribas

Calvert Group

CNP Assurances

Credit Suisse Group

Deutsche Bank

Goldman Sachs

Henderson Global Investors

HSBC

IFC

Innovest

ISIS Asset Management

KLP Insurance

Mitsui Sumitomo Insurance

Morgan Stanley

RCM (a member of Allianz DresdnerAsset Management)

UBSWestpac

World Bank Group

Note: Throughout this report, the pronoun We refersto the endorsing institutions listed above and not to the

individuals that have contributed to producing this report.


4/58

Contents

Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Background and scope of the report . . . . . . . . . . . . . . . . . . . . vii

Working group and partner organisations . . . . . . . . . . . . . . . . x

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Rationale and recommendations . . . . . . . . . . . . . . . . . . . . . . . 3

1. General considerations . . . . . . . . . . . . . . . . . . . . . . . 3

2. Investment rationale . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3. Meeting clients needs . . . . . . . . . . . . . . . . . . . . . . . 21

4. Integration in financial analysis . . . . . . . . . . . . . . . 27

5. Transparency and disclosure . . . . . . . . . . . . . . . . . . 31

6. Implementing change . . . . . . . . . . . . . . . . . . . . . . . 37

Conclusions and outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40


Who Cares Wins


5/58

Executive summary

This report is the result of a joint initiative of financial institutionswhich were invited by United Nations Secretary-General Kofi

Annan to develop guidelines and recommendations on how tobetter integrate environmental, social and corporate governanceissues in asset management, securities brokerage services andassociated research functions. Twenty financial institutions from9 countries with total assets under management of over 6 trillionUSD have participated in developing this report. The initiative issupported by the chief executive officers of the endorsing institu-tions. The U.N. Global Compact oversaw the collaborative effortthat led to this report and the Swiss Government provided thenecessary funding.

The institutions endorsing this report are convinced that in amore globalised, interconnected and competitive world the waythat environmental, social and corporate governance issues aremanaged is part of companies overall management quality need-ed to compete successfully. Companies that perform better withregard to these issues can increase shareholder value by, forexample, properly managing risks, anticipating regulatory actionor accessing new markets, while at the same time contributing tothe sustainable development of the societies in which they operate.Moreover, these issues can have a strong impact on reputation andbrands, an increasingly important part of company value.

The report aims at increasing the awareness of all involvedfinancial market actors, at triggering a broader discussion, andsupporting creativity and thoughtfulness in approach, rather thanbeing prescriptive. It also aims to enhance clarity concerning therespective roles of different market actors, including companies,regulators, stock exchanges, investors, asset managers, brokers,

analysts, accountants, financial advisers and consultants. It there-fore includes recommendations for different actors, striving tosupport improved mutual understanding, collaboration and con-structive dialogue on these issues.

The endorsing institutions are committed to start a process tofurther deepen, specify and implement the recommendations out-lined in this report by means of a series of individual and

i


Who Cares Wins


6/58

collaborative efforts at different levels. They are also keen to start adialogue with other stakeholders on ways to implement the recom-mendations because they are convinced that only if all actorscontribute to the integration of environmental, social and gover-nance issues in investment decisions, can significant improvements

in this field be achieved. As an important next step, endorsing insti-tutions plan to approach the relevant accounting standard-setting,professional and self-regulatory organizations, and investor rela-tions associations in order to ensure that their intentions are fullyunderstood and supported. They invite the Global Compact or oneof its implementing bodies to review the state of the implementa-tion of this reports recommendations in a years time with the goalof assessing how market actors have responded to the call foraction by this report.

Endorsing institutions are convinced that a better considerationof environmental, social and governance factors will ultimatelycontribute to stronger and more resilient investment markets, aswell as contribute to the sustainable development of societies.

The reports recommendations can be summarized as follows:

Analysts are asked to better incorporate environmental, socialand governance (ESG) factors in their research where appro-priate and to further develop the necessary investmentknow-how, models and tools in a creative and thoughtful way.Based on the existing know-how in especially exposed indus-tries, the scope should be expanded to include other sectorsand asset classes. Because of their importance for sustainabledevelopment, emerging markets should receive particular con-sideration and environmental, social and governance criteriashould be adapted to the specific situation in these markets.Academic institutions, business schools and other researchorganisations are invited to support the efforts of financial

analysts by contributing high-level research and thinking.

Financial institutions should commit to integrating environ-mental, social and governance factors in a more systematic wayin research and investment processes. This must be supportedby a strong commitment at the Board and senior managementlevel. The formulation of long-term goals, the introduction oforganisational learning and change processes, appropriate

ii


Who Cares Wins


7/58

training and incentive systems for analysts are crucial inachieving the goal of a better integration of these issues.

Companies are asked to take a leadership role by implement-ing environmental, social and corporate governance principles

and polices and to provide information and reports on relatedperformance in a more consistent and standardised format.They should identify and communicate key challenges andvalue drivers and prioritise environmental, social and gover-nance issues accordingly. We believe that this information isbest conveyed to financial markets through normal investorrelation communication channels and encourage, when rele-vant, an explicit mention in the annual report of companies.Concerning the outcomes of financial research in this field,companies should accept positive as well as critical results.

Investors are urged to explicitly request and reward researchthat includes environmental, social and governance aspectsand to reward well-managed companies. Asset managers areasked to integrate research on such aspects in investmentdecisions and to encourage brokers and companies to providebetter research and information. Both investors and assetmanagers should develop and communicate proxy votingstrategies on ESG issues as this will support analysts and fundmanagers in producing relevant research and services.

Pension fund trustees and their selection consultants areencouraged to consider environmental, social and governanceissues in the formulation of investment mandates and theselection of investment managers, taking into account theirfiduciary obligations to participants and beneficiaries. Govern-ments and multilateral agencies are asked to proactivelyconsider the investment of their pension funds according to theprinciples of sustainable development, taking into account their

fiduciary obligations to participants and beneficiaries.

Consultants and financial advisers should help create agreater and more stable demand for research in this area bycombining research on environmental, social and governanceaspects with industry level research and sharing their experi-ence with financial market actors and companies in order toimprove their reporting on these issues.

iii


Who Cares Wins


8/58

Regulators are invited to shape legal frameworks in a pre-dictable and transparent way as this will support integration infinancial analysis. Regulatory frameworks should require aminimum degree of disclosure and accountability on environ-mental, social and governance issues from companies, as this

will support financial analysis. The formulation of specificstandards should, on the other hand, rely on market-drivenvoluntary initiatives. We encourage financial analysts to par-ticipate more actively in ongoing voluntary initiatives, such asthe Global Reporting Initiative, and help shape a reportingframework that responds to their needs.

Stock exchanges are invited to include environmental, socialand governance criteria in listing particulars for companies asthis will ensure a minimum degree of disclosure across all list-ed companies. As a first step, stock exchanges couldcommunicate to listed companies the growing importance ofenvironmental, social and governance issues. Similarly, otherself-regulatory organizations (e.g. NASD, FSA), professionalcredential-granting organizations (e.g. AIMR, EFFAS), account-ing standard-setting bodies (e.g. FASB, IASB), publicaccounting entities , and rating agencies and index providersshould all establish consistent standards and frameworks inrelation to environmental, social and governance factors.

Non-Governmental Organisations (NGOs) can also contributeto better transparency by providing objective information oncompanies to the public and the financial community.

iv


Who Cares Wins


9/58

Graphical summary of key recommendations

Overall goals:

Stronger and more resilient financial markets Contribution to sustainable development

Awareness and mutual understanding of involvedstakeholders

Improved trust in financial institutions

Better investment

markets+

Moresustainable

societies

CompaniesLead the way by

implementing ESGprinciples and

improving reportingand disclosure

Regulators / stockexchanges /governments

Implementreporting standards

Listingparticulars

Analysts / BrokersIncorporate ESG

factors intomainstream

research

Investors / Assetmanagers

Reward ESGresearch

Integrate ESGfactors in research

and investmentprocesses

ConsultantsCombine ESG

research withindustry level

research

Support demandand awareness

building

AccountantsFacilitate

standardisationEducatorsFacilitate high-

level thinking andtraining on ESG

issues

NGOsProvide

objective ESGinformation on

companies to thepublic and the

financial community

Pension trusteesConsider integrating

mandates andselection of managers

Governments/Multilat. agencies

Proactivelyconsider in PF

investment

v


Who Cares Wins


10/58


11/58

vii


Who Cares Wins

Background and scope of the report

This report is the result of a joint effort of financial institutionswhich were invited by United Nations Secretary-General Kofi

Annan to develop guidelines and recommendations on how to bet-ter integrate environmental, social and governance issues in assetmanagement, securities brokerage services and associatedresearch functions. The work that led to this report took placeunder the auspices of the U.N. Global Compact.

The Global Compact is a corporate responsibility initiativelaunched by Secretary-General Kofi Annan in 2000 with the pri-mary goal of implementing universal principles in business. Byestablishing the link between environmental, social and gover-nance issues and investment decisions, this report wishes tocontribute to better integration of these factors in investment deci-sions which will ultimately support the implementation of theGlobal Compact principles throughout the business world.

The need for this report has been repeatedly expressed to theU.N. Secretary-General and to the Global Compact by senior exec-utives of financial institutions and other companies which aresignatories to the Global Compact. In January 2004, Secretary-General Kofi Annan wrote to the CEOs of 55 of the worlds leadingfinancial institutions inviting them to join in the initiative that led tothe development and release of this report.


12/58

viii


Who Cares Wins

Exhibit 1

Brief description of the U.N. Global Compact

Launched in July 2000 by United Nations Secretary-General Kofi

Annan, the Global Compact is an international initiative bringing com-

panies together with UN agencies, labour and civil society to support

ten principles in the areas of human rights, working conditions, the

environment, and anti-corruption. Through the power of collective

action, the Global Compact seeks to advance responsible corporate

citizenship so that business can be part of the solution to the chal-

lenges of globalisation. In this way, the private sector in

partnership with other social actors can help realize the Secretary-

Generals vision: a more stable and inclusive global economy.

The Global Compact is a voluntary corporate citizenship initia-

tive endorsed by companies from all regions of the world. It has

two objectives:

1. Mainstream the ten principles in business activities aroundthe world

2. Catalyse actions in support of UN goals

To achieve these objectives, the Global Compact offers facilitation

and engagement through several mechanisms: Leadership Model,

Policy Dialogues, Learning, Local Networks and Projects.

As of June 2004, more than 1,500 companies worldwide had com-

mitted to the Global Compact and its principles.


13/58

Exhibit 2

U.N. Global Compact Principles

Human Rights

Principle 1: Businesses should support and respect the protec-tion of internationally proclaimed human rightswithin their sphere of influence; and

Principle 2: make sure that they are not complicit in humanrights abuses.

Labour

Principle 3: Businesses should uphold the freedom of associa-tion and the effective recognition of the right to

collective bargaining;Principle 4: the elimination of all forms of forced and compulso-

ry labour;

Principle 5: the effective abolition of child labour; and

Principle 6: eliminate discrimination in respect of employmentand occupation.

Environment

Principle 7: Businesses should support a precautionaryapproach to environmental challenges;

Principle 8: undertake initiatives to promote greater environ-mental responsibility; and

Principle 9: encourage the development and diffusion ofenvironmentally friendly technologies.

Anti-Corruption

Principle 10: Businesses should work against corruption in all itsforms, including extortion and bribery.*

* The Secretary-General introduced this principle at the Global Compact Leaders Summit on 24 June 2004.

ix


Who Cares Wins


14/58


15/58

xi


Who Cares Wins

UBSJulie Hudson

WestpacMartin Hancock

Global Compact OfficeGavin Power

The Conference BoardMeredith WhitingDavid Vidal

Columbia Business SchoolBruce Usher

UNEP-FI AMWGCarlos JolyVincent ZellerUNEP-FIJacob MalthousePaul Clements-HuntPhilip Moss

Facilitator:

onValues InvestmentServicesand ResearchIvo Knoepfel

Exhibit 4

AcknowledgementsWe would like to express our sincere appreciation for all individuals

that have provided valuable insights and input for this report, including:

Duncan Austin, World Resources Institute; Stephen Hine, EIRIS; Alois

Flatz, SAM Research; Matthew Kiernan, Innovest; Regula Ritter,

onValues; Anne-Maree OConnor, Core Ratings; Caroline Desaegher,

AXA; Bjoern Edlund, ABB; Herman Mulder, ABN AMRO; Felix Schnella,

RCM; Gunnar Miller, RCM; Bernardo Rothe, Banco do Brasil; Emma

Hunt, Forum for the Future; Jerome Lavigne-Delville, Global Compact;

Barbara Dubach, Holcim; Glen Armstrong, International Finance

Corporation; Peter Sherratt, Lehman Brothers; Peter Zollinger,

SustainAbility Ltd.; Thilo Goodall, Sustainable Asset Management;

Ambassador Peter Maurer, Swiss Federal Department of Foreign

Affairs; Gerald Pachoud, Swiss Federal Department of Foreign Affairs;

Ingeborg Schumacher, UBS; Mira Merne, AccountAbility; David

Levine, Haas School of Business.

Members of the working group (continued)


16/58

xii


Who Cares Wins

Exhibit 5

Partner organisations

The Conference BoardThe Conference Board creates and disseminates knowledge about

management and the marketplace to help businesses strengthen their

performance and better serve society. Working as a global, independ-

ent membership organization in the public interest, it conducts

research, convenes conferences, makes forecasts, assesses trends,

publishes information and analysis, and brings executives together to

learn from one another. The Conference Board runs a total of 11 mem-

ber Councils on corporate citizenship issues and a total of six Councils

on corporate governance related aspects. Councils are membership

groups joining executives with common responsibilities and interests

to share solutions to business challenges.

Columbia Business SchoolColumbia Business Schools Social Enterprise Program aims to

inspire and prepare leaders who create social value in business, non-

profit and government organizations. Situated in the worlds financial

capital and widely admired for its global and cutting-edge curriculum,

Columbia Business School is one of the worlds leading business

schools. Finance and Sustainability , a course taught by BruceUsher, will draw on insights from this project to prepare future lead-

ers in finance to create social, environmental and economic value.

The UNEP Finance InitiativeThe United Nations Environment Programme Finance Initiative (UNEP-

FI) is a global public private partnership between the United Nations

Environment Programme and 239 firms from across the global financial

services sector. Its mission is to collaboratively integrate relevant envi-

ronmental, social and corporate governance criteria into financialsector operations and services. The Asset Management Working Group

(AMWG) of UNEP-FI includes 12 financial institutions and has actively

contributed to drafting this report. Its goals are three-fold: 1. sector-

specific financial analysis of ESG issues; 2. engagement with

institutional investors; 3. ESG management as a risk mitigation option

for emerging market investment.


17/58

Introduction

In an increasingly complex and interconnected world, the impor-tance of actively managing risks and opportunities related to

emerging environmental and social trends, in combination withrising public expectations for better accounta-bility and corporate governance, presents a newset of challenges with far-reaching financial con-sequences for corporations. This is true both atthe level of companies and at the level of invest-ment portfolios.

The financial industry has begun to acknowl-edge the importance of such issues and hasengaged in a series of initiatives to improve theirmanagement in core business processes. Severalinstitutions have implemented systems to manageenvironmental risks in their lending businesses.Other companies have engaged in initiativesaimed at improving accountability and governance or the integrationof environmental and social aspects in project financing 1.

Until now, the industry has not developed a common under-standing on ways to improve the integration of environmental,social and governance (ESG) aspects in asset management, secu-rities brokerage services and the associated buy-side and sell-sideresearch functions. This is due partly to the complexity and diver-sity of issues involved.

As more analysts and fund managers have begun to experimentwith the integration of these issues, knowledge and awareness inthe industry is increasing. Investors have also become more vocalin their demand for products and services incorporating such

aspects. We therefore believe that this is the right time to provide the industry with better guidance on ways to improve the consideration of environmental, social and governance issues ininvestment decisions.

Throughout this report we have refrained from using termssuch as sustainability, corporate citizenship, etc., in order to avoid

1 For example, in the context of the recently released Equator Principles

Every corporationis under intense pressureto create ever-increasing

shareholder value. Enhancing environmental

and social performanceare enormous business

opportunities todo just that.

Gary M. PfeifferCFO, Du Pont

1


Who Cares Wins


18/58

2


Who Cares Wins

misunderstandings deriving from different interpretations of theseterms. We have preferred to spell out the environmental, social andgovernance issues which are the topic of this report.

This report focuses on issues which have or could have a mate-

rial impact on investment value. It uses a broader definition ofmateriality than commonly used one that includes longer time-horizons (10 years and beyond) and intangible aspects impactingcompany value. Using this broader definition of materiality,aspects relating to generally accepted principles and ethical guide-lines (e.g. the universal principles underlying the Global Compact)can have a material impact on investment value.

Sound corporate governance and risk management systemsare crucial pre-requisites to successfully implementing policiesand measures to address environmental and social challenges.This is why we have chosen to use the term environmental, socialand governance issues throughout this report, as a way of high-lighting the fact that these three areas are closely inter-linked.

In particular, we believe that corporate governance systems canplay a key role in implementing many of the recommendations inthis report, particularly with regard to better transparency and dis-closure, linking executive compensation to longer-term drivers ofshareholder value and improving accountability.

Recently released recommendations on best practices in thecorporate governance field, such as those released by TheConference Board Commission on Public Trust and PrivateEnterprise 2 , lay out a corporate governance framework which inour view is crucial in order to successfully implement therecommendations outlined in this report.

2 Conference Board Commission on Public Trust and Private Enterprise: Findings and Recommendations, 2004


19/58

Rationale and recommendations

1. General considerations

Ultimately, successful investment depends on avibrant economy, which depends on a healthy civilsociety, which is ultimately dependent on asustainable planet. In the long-term, therefore,investment markets have a clear self-interest incontributing to better management of environmen-tal and social impacts in a way that contributes tothe sustainable development of global society. Abetter inclusion of environmental, social and cor-porate governance (ESG) factors in investmentdecisions will ultimately contribute to more stableand predictable markets, which is in the interest ofall market actors.

To some extent, financial markets are alreadyfactoring in environmental and social issues, but often only if theyare seen as being material to value creation and risk in the short-term. In addition, we believe that markets do not yet fully recognisethe importance of new emerging trends, such as the growingpressure on companies to improve corporate governance, trans-parency and accountability and the increasing importance ofreputation risks related to ESG issues.

The integration of these aspects in investment decisions isincreasingly viewed as falling within the scope of the fiduciary dutyof trustees, financial advisers, asset managers and intermediaryinstitutions. It therefore needs to be addressed effectively by allinvolved market actors.

We recognise that a series of barriers have in the past hindereda better integration of ESG factors. CEOs and CFOs recently inter-viewed by the World Economic Forum 3 , for example, stressed thatintangible aspects related to ESG issues play an increasinglyimportant role in value creation but that analysts short-term focus

Creating long-termvalue for our share-

holders whileconcurrently ensuringthe enduring viability

of our human and natural resources is animportant part of our business philosophy.

Dr. Josef AckermannChairman of the GroupExecutive Committee

Deutsche Bank AG

3


Who Cares Wins

3 World Economic Forum: Values and Value Communicating the strategic importance of corporate citizenship to investors, 2003 CEO Survey


20/58

hinders them in recognising this trend. Challenges cited by theWEF survey include:

Problems of definition of ESG issues Problems of making and measuring the business case

Problems with quality and quantity of information Problems of skills and competence Problems of differing time horizons

Additional challenges which have been men-tioned by analysts and fund managers in pastsurveys related to the long-term nature of manyESG issues and the uncertainty about futureregulation in this area.

Throughout this report we will address theseobstacles and show how they could be over-come. Obstacles related to time horizons andregulation are addressed in chapter 1, obstaclesrelated to defining and measuring the business

case in chapter 2, obstacles related to skills and competences inchapters 4 and 6, and obstacles related to information in chapter 5.

Environmental and social issues count. (...)

In an increasingly complex world we believe such issues are part of the relative quality of overall management

performance needed to

compete successfully.

Goldman Sachs GlobalInvestment Research

4


Who Cares Wins


21/58

5


Who Cares Wins

Recommendations:

a. We are convinced that it is in the interest of investors,asset managers and securities brokerage houses alike

to improve the integration of ESG factors in financial analysis. This will contribute to better investment

markets as well as to the sustainable development of the planet.

b. We invite all financial market actors, including

investors, asset managers, analysts, financial advisers and consultants to improve their understanding and consideration of these trends and related potential impacts. This will not be possible without adequate disclosure on these matters by companies.

c. The use of longer time horizons in investment is animportant condition to better capture value creationmechanisms linked to ESG factors. We therefore

invite investors and other market actors to include longer time horizons in investment mandates and to request research supporting this development.

d. We urge regulators to be transparent with regard to

the nature and timing of new regulations concerning ESG issues relevant to investment. This will make regulatory changes more predictable and quantifiable for financial markets and will support integration in

financial analysis.


22/58

Exhibit 6

A selection of ESG issues impacting company and invest-ment value

ESG issues relevant to investment decisions differ across regions and

sectors. The following are examples of issues with a broad range of

impacts on companies:

Environmental issues: Climate change and related risks

The need to reduce toxic releases and waste

New regulation expanding the boundaries of environmental lia-bility with regard to products and services

Increasing pressure by civil society to improve performance,transparency and accountability, leading to reputational risks ifnot managed properly

Emerging markets for environmental services andenvironment-friendly products

Social issues: Workplace health and safety

Community relations

Human rights issues at company and suppliers /contractors premises

Government and community relations in the context of opera-tions in developing countries

Increasing pressure by civil society to improve performance,transparency and accountability, leading to reputational risks ifnot managed properly

Corporate governance issues: Board structure and accountability

Accounting and disclosure practices

Audit committee structure and independence of auditors Executive compensation

Management of corruption and bribery issues

6


Who Cares Wins


23/58

Exhibit 7

World Economic Forum Initiatives

Survey of CEOs and CFOs on communication with thefinancial community

In January 2004, the World Economic Forums Corporate Citizenship

Initiative released results of a survey of CEOs and CFOs of member

companies focusing on the communication of corporate citizenship to

investors and financial institutions 4 .

Surveyed CEOs/CFOs note many positive signs with regard to an

increasing interest and activity by investors, analysts and financial insti-

tutions concerning ESG matters. 70% of respondents expect to see

increased interest in ESG issues by mainstream investors in the future.

But they also highlight what they perceive as being key obstacles

to mainstream investors who show more interest in how corporations

address ESG risks and opportunities:

Problems of definition of ESG issues

Problems of making and measuring the business case

Problems with quality and quantity of information

Problems of skills and competence

Problems of differing time horizons

In terms of interest from mainstream investors, just over two-

thirds of the companies that participated in the survey claimed that

they are occasionally asked questions about their corporate citizen-

ship activities, but usually only when there has been a crisis related to

their industry or company, or around certain hot topics such as cli-

mate change, diversity, obesity and HIV/AIDS. The head of investor

relations at one company reflected the comments of many others,

These issues never come up unless there is a problem no onecares unless theres a financial risk or short-term exposure. One CFO

commented, With a few honourable exceptions, most mainstream

investors ask little or nothing about social responsibility. That might

change in the event of a serious environmental/community/political

incident, which raised questions about the companys performance.


7


Who Cares Wins


24/58

8


Who Cares Wins

Initiative on corporate citizenship and investment

WEFs Global Corporate Citizenship Initiative, in association with

AccountAbility, is also exploring how best to improve the understand-

ing of concrete impediments to, and opportunities for, the broader

integration of the social and environmental aspects of corporate citi-

zenship in mainstream investment policies and practices. The initiative

is grounded in a series of international roundtables with some of the

financial sectors most important actors from pension funds, asset

management companies and regulators. The initiative will offer

insights into how best to impact information, competencies and incen-

tives along the investment value chain. Results will be published in a

WEF/AccountAbility report in October 2004.


25/58

2. Investment rationale

The investment rationale for more rigorous inclusion of ESGcriteria in financial analysis rests on the business case at the level

of the company. Several recent studies of com-panies and industries have contributed to betterunderstanding the value drivers through whichgood management of ESG issues contributes toshareholder value creation.

Furthermore, many studies confirm that theway a company manages ESG issues is often agood indicator of overall risk levels and generalmanagement quality which are both strongdeterminants of companies long-term success.A recent report on the oil and gas industry byGoldman Sachs, for example, concludes thatcompanies with the best track record in terms ofsocial responsibility and a long-term vision abouta low-carbon future also dominate the market share of strategicprojects, which is seen as a key determinant of business success.

Companies with better ESG performance can increase share-holder value by better managing risks related to emerging ESGissues, by anticipating regulatory changes or consumer trends, andby accessing new markets or reducing costs. Instead of focusing onsingle issues, successful companies have learnedto manage the entire range of ESG issues relevantto their business, thereby achieving the bestresults in terms of value creation. Moreover, ESGissues can have a strong impact on reputation andbrands, an increasingly important part of compa-ny value. It is not uncommon that intangible

assets, including reputation and brands, representover two-thirds of total market value of a listedcompany. It is likely that ESG issues will have aneven greater impact on companies competitive-ness and financial performance in the future.

It is interesting to note that, when asked, both investors/assetmanagers and company representatives confirm the increasing

Considering that alarge share of

company value isintangible and relates

to future earnings, it isevident that risks and opportunities deriving from environmentaland social trends areof great importance.

Martin HancockChief Operating Officer

Westpac, London Branch

The Corporate Social Responsibility impera-

tive is one which, webelieve, will increase inimportance over time.(...) Looking at CSRcould improve stock

picking ability.

ABN AmroEquities Research

9


Who Cares Wins


26/58

importance of intangible ESG factors in shareholder value creation.In a survey by Cap Gemini Ernst & Young, for example, 81% ofGlobal 500 executives rated environmental, health and safetyissues among the top ten factors driving value in their businesses.In a survey by CSR Europe, Deloitte and Euronext, 40% of inter-

viewed fund managers and analysts, and over 50% of investorrelations officers, confirmed a significant contribution to value cre-ation by intangible aspects.

Even within the same industry electric

utilities the level of financial risk exposure to

regulatory responses toclimate change can vary

by a factor of 30.

Matthew KiernanCEO, Innovest Strategic

Value Advisors

10


Who Cares Wins

Recommendations:

e. We call on financial analysts to take an active role intesting and refining the investment rationale for ESG integration in research and investment decisions. We invite analysts not only to focus on ESG risks and risk

management, but also to consider ESG issues as a potential source of competitive advantage.

f. We invite academic institutions, business schools and research think-tanks to support financial analysts

work in this field by contributing forward-thinking research on ESG risks and opportunities and the related business and investment case, of both a strategic and quantitative nature.


27/58

A companysshort-term market value

Dont know5%

In apositive

wa y32%

Noinfluence

55 %

In anegative

wa y8%

A companyslong-term market value

Don't know5%No

influence13%

In anegative

way4%

In apositive

way78%

11


Who Cares Wins

Exhibit 8

The view of fund managers, analysts and investor rela-tions officers

A recent survey conducted among European fund managers, analysts

and investor relations officers 5 found that in the opinion of 78% of

fund managers and analysts, the management of environmental and

social risk has a positive impact on a companys long-term market

value. In the case of a shorter time horizon (3-12 months), only 32% of

respondents believe that environmental and social risk management

significantly impact market value.

Figure 1: Results of the CSR Europe, Deloitte and Euronext surveyof European fund managers, analysts and investor relations offi-

cers. Reply to the question: Based on your experience, how doessocial and environmental risk management impact on a companysshort-term/long-term market value?

5 CSR Europe, Deloitte, Euronext,: Investing in Responsible Business. The 2003 survey of European fund managers, financial analysts and investor relations officers.


28/58

12


Who Cares Wins

Exhibit 9

Drivers through which good management of ESG issuescan contribute to shareholder value creation:

Early identification of emerging risks, threats, management failures

New business opportunities

Customer satisfaction and loyalty

Reputation as an attractive employer

Alliances and partnerships with business partners and stake-holders

Enhanced reputation and brands

Reduced regulatory intervention

Cost savings Access to capital, lower cost of capital

Better risk management, lower risk levels

Exhibit 10

Environment, Healthy and Safety (EHS) performance asan intangible driver of market value

In February 2004, a study released by the Global Environmental

Management Initiative 6 , based on earlier research by Cap Gemini

Ernst & Young 7 8 , came to the conclusion that:

50 to 90% of a firms market value can be attributed to intangi-bles like EHS.

35% of institutional investors portfolio allocation decisions arebased on intangibles like EHS performance.

81% of Global 500 executives rate EHS issues among the topten factors driving value in their businesses.

6 GEMI: Clear Advantage: Building Shareholder Value, February 2004.

7 Cap Gemini Ernst & Young: Measures that Matter, 1996 (a survey of 300 sell-side analysts, 275 buy-side analysts, as well as interviews with portfolio managers)

8 Cap Gemini Ernst & Young: Decisions that Matter, 1999 (a survey of financial executives at global 500 corporations).


29/58

13


Who Cares Wins

Exhibit 11

Goldman Sachs Energy Environmental and Social Index(A. Ling, J. Waghorn, S. Forrest, M. Lanstone, Feb. 2004)

Goldman Sachs (GS) recently released the Goldman Sachs Energy

Environmental and Social (GSEES) Index for the energy sector as a

response to UNEP Finance Initiatives call for better research in this

field. The scope of GSEES is to identify specific environmental and

social issues likely to be material for company competitiveness and

reputation in the oil and gas industry and, to the extent possible, to

quantify their potential impact on stock prices. 30 criteria in the

following eight categories have been used, including environmental

and social issues:

Climate change

Pollution

Human rights

Management diversity and incentives

Investment in the future

Workforce

Safety

Transparency and vision

Rationale

To succeed in the rapidly evolving energy industry, GS believes com-

panies have to win, and then operate, larger, more complicated

projects, often in new regions (so-called new legacy assets).

Competition is more intense, the workforce smaller and external

observers less forgiving. The analyst team that worked on the GSEES

Index set out to explore a potential correlation between environmen-

tal and social management quality and the capability to succeed inwinning and managing new legacy assets.

GS notes that ultimately the industry is moving from the age of oil

to the age of gas, and potentially to an even lower carbon world. To

succeed in this new world, GS believes companies must be both envi-

ronmentally and socially aware, in order to succeed in managing a


30/58

14


Who Cares Wins

diverse workforce in a socially responsible and acceptable manner

with a vision of the evolution of the industry towards the age of gas.

An increased focus on climate change and corporate governance,

together with the rise of socially responsible investment (SRI)-man-

aged money and non-governmental organisation (NGO) activity, are

additional issues that the industry needs to manage.

Main conclusions from the GSEES Index

Based on the experience of calculating the Index and on its results, GS

concludes that one-off environmental and social issues have limited

impact on share prices unless they have a material impact on the

underlying returns of the company in question. A strong performance

in social and environmental issues is no guarantee of stock market per-

formance. That said, GS notes that social and environmental issues are

having an increasing impact on companies future project slates. GS

believes that this will have an increasing impact on future returns, and

therefore valuation and share price performance.

In addition, GS notes that those companies with the best track

record in terms of social responsibility and a vision of a low-carbon

world for the future (i.e. with the best GSEES scores) dominate the

market share of new legacy projects, a strong determinant of business

success. GS adds that It stands to reason that the best-managed com-

panies deliver the best performance with regard to social and

environmental issues and their interaction with the general business

community. It is not surprising that they manage these issues as well

as they manage the other more traditional success factors.

Detailed results

The GSEES Index was created by scoring companies relative to each

other on metrics within the defined eight categories. GS found signif-

icant differences in performance across categories, but somecompanies score consistently well, notably BP, RD/Shell, Statoil and

ExxonMobil. BP and RD/Shells scores are 8% higher than that of their

nearest peer, ExxonMobil.


31/58

15


Who Cares Wins

Changing production mix

Larger, more complex projects

Increasing competition

Transparency initiatives

Rise of NGOs and SRI funds

Globalising gas industry

Renewables

Increasing environmentalawareness

Reduced workforce the war for talent

21% of production non-OPEC in 1970,42% in 2002, 70% of new legacy assetsnon-OPEC

Average size of new legacy field is1.7 bnboe and will require US$4 bnin capex to develop

Employees in US oil and gas industryhave slumped by 30% from 1981-1999and 55% in E&P alone

The industry is much morecompetitive post the consolidationwhich started in 1998, and the riseof the Emerging Market Regionals

Extractive Industry TransparencyInitiative (EITI) is the most significantmove to improve visibility of revenuesbetween industry and governments

The WTO lists 966 NGOs, Eurosifestimates that 14% of Europeanpension funds are influenced by SRI

Local governments areincreasingly forcing the industryinto more environmentally friendly

development e.g., no flaring of gasin West Africa beyond 2008

Oil demand growth is less thanhalf GDP, gas more than GDP. Within20 years consumption of gas willovertake oil with LNG, GTL thenhydrogen powered fuel cells

Further attempts to reduce carboncontent mean a move to developrenewable energy sources suchas wind

Currentage of

oil,OPEC

Future ageof gas and

beyond

Figure 2: Evolution of the industry towards the age of gas andrenewables 9

9 Goldman Sachs Global Investment Research February 24, 2004

Goldman Sachs Scenario


32/58

16


Who Cares Wins

theCompany Climate

ChangePollution Human

RightsManagementDiversity and

Incentives

Investmentin theFuture

Workforce Safety TransparencyVisionand

Average 11.9 4.7 8.2 15.7 5.0 13.6 12.1 9.3Maximum 25 8 12 23 10 25 25 14

BP 23 3 11 20 6 22 21 14

RD/Shell 22 3 9 21 8 19 21 14

Statoil 18 7 11 18 5 19 18 13

ExxonMobil 13 3 8 18 8 23 23 12

Norsk Hydro 18 8 10 13 7 16 17 10

TOTAL 19 4 9 18 10 19 9 9ChevronTexaco 14 3 10 20 8 19 13 8

BG 17 8 10 15 5 13 16 10

ENI 15 8 10 16 6 13 12 10

OMV 15 5 9 15 6 12 13 10

ConocoPhillips 12 6 9 20 7 11 8 11

Amerada Hess 14 5 10 15 2 11 11 11

Occidental 10 5 6 21 2 9 14 9

Marathon 5 3 6 20 2 15 17 7

Repsol 15 3 10 12 6 12 5 11

Petrobras 5 5 7 13 3 13 13 7

CNOOC5 8 6 13 3 13 9 8

PetroChina 5 5 7 17 4 10 7 8

MOL 7 2 7 10 6 8 12 10

Sinopec 5 3 6 11 6 12 5 8

Yukos 7 4 7 10 2 7 5 5

Lukoil 5 4 6 12 2 8 5 4

CEPSA 5 2 5 13 2 9 5 4

80.5

142

GSEES Index Overall Score (Max=142)

Majors

Regionals

EmergingMarket

Regionals

120 117 109 108 99 97 95 94 90 85 84 79 76 75 74 66 65 63 62 56 47 46 45Average

Maximum B P

R D / S h e l l

S t a t o i l

E x x o n M o

b i l

N o r s k

H y d r o

T O T A

L

C h e v r o n T e x

a c o

B G E N I

O M V

C o n o c o P h i l

l i p s

A m e r a d aH

e s s

O c c i d e

n t a l

M a r a t

h o n

R e p s o l

P e t r o b

r a s

C N O O C

P e t r o C h

i n a

M O L

S i n o p e c

Y u k o

s

L u k o i l

C E P S A

Figure 3: Company relative positioning on the Goldman SachsEnergy Environmental and Social Index 10

10 Goldman Sachs Global Investment Research February 24, 2004

Goldman Sachs Energy Environmental and Social Index


33/58

17


Who Cares Wins

Exhibit 12

Case-study on the automobile industry

(Sustainable Asset Management and World Resources Institute,

Changing Drivers: The Impact of Climate Change on Competitiveness

and Value Creation in the Automotive Industry , October 2003.)

In a 2003 report, SAM and WRI used conventional shareholder val-

uation techniques to demonstrate how emerging policies to tackle

climate change could alter discounted future earnings for the ten

largest global auto companies.

Emerging climate policies create both financial risks and opportu-

nities for auto manufacturers. The report used scenarios of future

regulatory policies and industry commitments to identify possible

cost and earnings trajectories for the auto companies over the next

decade. The analysis paired data on ESG factors, such as the CO 2

emissions intensity of specific vehicle models, with conventional

investment data, such as sales volumes and profit margins. The

analysis also explicitly assessed the quality of management in

addressing climate change issues.

From discussions with auto analysts, it appears that the mid- to

long-term impacts of climate change policy are not currently priced

in to auto company stock values. Yet, the SAM/WRI analysis shows

that pricing in the impact of climate change policies could significantly

affect earnings (see Figure 4). Moreover, companies are very different-

ly positioned on this issue, indicating that climate change will be a new

and additional influence on competitiveness within the industry.


34/58

Exhibit 13

The view of fund managers, analysts and investor rela-tions officers

A recent survey of European fund managers, analysts and investor

relations officers indicates that the link between intangible assets and

shareholder value is widely acknowledge by the financial industry 11 .

The ability to innovate (65%), and corporate governance and risk man-agement (54%) were mentioned as top-ranking issues systematically

taken into account by fund managers and analysts. Environmental

impact management and supply chain management were ranked

highly as being integrated for some sectors or companies. This

reflects the need for a sector-specific approach in terms of both the

companys communication approach and financial analysis.

18


Who Cares Wins

Figure 4: Potential Impact of Climate Change Policies for Earningsof Leading Auto Companies (Percentage Change in EBIT Forecasts(2003-2015) from Pricing in Climate Change Policies) Source:SAM/WRI, Changing Drivers , 2003. Note: Vertical lines indicate pos-sible ranges for discounted EBIT; dots indicate most likelyforecast EBIT.

-15%

-10%

-5%

0%

5%

10%

15%

T o y o t a

R e n a u l

t N i s

s a n H o

n d a D C V W P S A

B M W G M F o r

d


35/58

19


Who Cares Wins

Figure 5: Results of the CSR Europe, Deloitte and Euronext survey ofEuropean fund managers, analysts and investor relations officers 12

Fund managers

andanalysts

IROs

No answerNo,not at all

No,not really

Yes,a little

In your opinion, do intangible assets contribute to shareholder value?(Question to fund managersand analysts and IROs)

Yes,significantly

0 %

10 %

20 %

30 %

40 %

50 %

60 %

11 CSR Europe, Deloitte, Euronext: Investing in Responsible Business. The 2003 survey of European fund managers, financial analysts an investor relations officers.

12 CSR Europe, Deloitte, Euronext: Investing in Responsible Business. The 2003 survey of European fund managers, financial analysts an investor relations officers.


36/58

Figure 6: Results of the CSR Europe, Deloitte and Euronext survey ofEuropean fund managers, analysts and investor relations officers 13

Which topic is taken into account when making an investment recommendation?(Question to fund managers and analysts and IROs)

Fund managersand analysts IROs

Management ofcommunity relations

Management ofsupply chain(social and

environmental issues)

Managementofenvironmental impacts

Managementofhumanresources

Ability toinnovate0%

20%

40%

60%

80% Managementof the brand

Corporate governanceand riskmanagement

Managementofcustomer relations

Option 2: Yes, for some sections or companies

Managementofcommunity relations

Management of

supply chain(social and

environmental issues)

Management ofenvironmental impacts

Management ofhumanresources

Ability toinnovate

Managementof the brand

Corporate governanceandrisk management

Managementofcustomer relations

0%20%

40%

60%

80%

Option 1: Yes, systematically

13 CSR Europe, Deloitte, Euronext: Investing in Responsible Business. The 2003 survey of European fund managers, financial analysts an investor relations officers. 20


Who Cares Wins


37/58

3. Meeting clients needs

Recently, institutional investors have launched a series of joint ini-tiatives calling on companies to improve disclosure and on

investors and asset managers to improve theirconsideration of ESG aspects in investment deci-sions and in engaging with companies. A widerange of issues and sectors has been touchedupon by these initiatives, including climatechange, corporate governance, issues relating tothe pharmaceutical industry, the disclosure ofpayments to governments and the managementof corruption and bribery cases.

We welcome these initiatives because theysupport better disclosure and transparency bycompanies and the efforts of financial marketactors to better integrate these issues in theinvestment value-chain. Clearly, it is clientdemand that will most effectively trigger change in the financialindustry. That said, we believe that in addition to requesting betterintegration of ESG factors, clients must also be prepared to explic-itly demand and reward better researchand investment services taking intoaccount ESG aspects.

Given the importance of pension fundsin the world of asset management, trusteesand their consultants can play a pivotal rolein requesting better coverage of ESG issuesin investment mandates and the underlyingresearch. Consultants and financial advisersalso have an important role to play in creat-

ing greater and more stable demand forESG research.

Sell-side analysts have in the pastdemonstrated their preparedness in effec-tively responding to an explicit request byclients. A recent example was the call by the members of the UNEPFinance Initiative Asset Management Working Group requesting

There is a growing body of empirical evidencethat companies which

manage environmental, social and governance

risks most effectively tend to deliver better risk-adjusted financial

performance than their industry peers.

Jean FrijnsChief Investment Officer

ABP

The consideration of material social and environmental issues

should be part of every financial analysts normal

work. Not only does this make sense from an investment risk

perspective; institutionalclients are increasingly

asking for better integrationin fund management.

Thomas AlbrechtDirector of ResearchCredit Suisse Asset

Management

21


Who Cares Wins


38/58

22


Who Cares Wins

Recommendations:

g. We encourage pension fund trustees and their selection consultants to consider integrating ESG issues into the formulation of investment mandates and the selection of investment managers, taking into

account their fiduciary obligations to participants and beneficiaries. We believe that governments and multilateral agencies should proactively consider the investment of their pension funds according to

the principles of sustainable development, taking into account their fiduciary obligations to participants and beneficiaries.

h. Consultants and financial advisers should support

the integration of ESG criteria by combining ESG research with industry level research and sharing their experience with financial actors and companies in order to improve ESG reporting.

i. We urge investors to explicitly request and reward research that includes environmental, social and governance aspects and to reward well-managed companies. Asset managers should integrate

research on such aspects in investment decisions and encourage brokers and companies to provide better research and information.

j. We encourage brokers and asset managers to more actively forge partnerships with institutional clients with a stated or potential interest in ESG research

ESG research from financial research organisations. Within aperiod of only 8 months, research organisations produced a total of11 reports on a wide range of industries and issues.


39/58

23


Who Cares Wins

Exhibit 14

Recent initiatives by institutional investors on ESG issues: The Carbon Disclosure Project, calling on companies to

provide investment-relevant information relating to green-house gas mitigation

The Institutional Shareholders Committee Principles, issuedby a group of large institutional investors, calling on fundmanagers to take a more active approach in relation to theirengagement with companies, which should include ESG issues

The Pharmaceutical Shareowners Groups call for better disclo-sure in the pharmaceutical industry

The Investors Statement on Transparency in the ExtractivesSector, aimed at increasing the transparency of payments madeby extractive sector companies to governments and govern-ment-linked entities

The U.S. Investor Network on Climate Risk, a group of US State

and City Treasurers and Trustees with fiduciary responsibilityfor some of Americas largest and most influential pension andlabour funds, which recently called for greater investor focus onclimate change risks and opportunities

The UK Institutional Investors Group on Climate Change, withsimilar goals as the U.S. Investor Network on Climate Risk

To be noted is also a 15% increase in U.S. shareholder resolu-tions relating to ESG issues from January 2001 to June 2003.

and raise the awareness of clients on the relevance

of ESG issues to their investments.

k. We invite investors to develop proxy voting guide-

lines clarifying their position on ESG issues. This will support asset managers and analysts in produc-

ing relevant research and implementing proxy voting strategies.


40/58

Exhibit 15

Investor networks on climate change

In November 2003, the United Nations convened a summit of institu-

tional investors in the US controlling more than $1 trillion in assets,

including several state and city treasurers, to discuss climate change

risks. This group set up an Investor Network on Climate Risk and

issued a 10-point call for action, including 14 :

The SEC to enforce corporate disclosure of climate change risks

Companies in major greenhouse gas-producing sectors (e.g. autos,power utilities) to report to shareholders on the financial implica-tions of climate change including regulation and competition

Investment managers to include climate change in their analyses.

Speaking at the summit, California State Treasurer Phil Angelides

commented, In global warming, we are facing an enormous risk to

the US economy and to retirement funds that Wall Street has so far

chosen to ignore. The corporate scandals over the last couple of years

have made it clear that investors need to pay more attention to cor-

porate practices that affect long-term value. As fiduciaries, we must

take it upon ourselves to identify the emerging environmental chal-

lenges facing the companies in which we are shareholders, to

demand more information, and to spur needed actions to respond to

those challenges.

In the UK, the Institutional Investors Group on Climate Change

brings together 19 funds with assets totalling 450 billion to focus on

investment risks and opportunities in this area. It has produced reports

on aviation and power generation, analysing the investment issues

from a move to a low-carbon economy. In both cases, the analysis con-

cluded that the sectors would be significantly affected, and that the

impacts would vary significantly from company to company, with clear

implications for sector weightings and stock selection.15

14 Association of British Insurers, Risk Returns and Responsibility, Author: Roger Cowe, Feb. 2004


24


Who Cares Wins


41/58

Exhibit 16

Financial research organisations respond to buy-side callfor more ESG research

The Asset Management Working Group (AMWG) of the UNEP Finance

Initiative, comprising 12 financial institutions managing total assets of

about 1.6 trillion USD, recently invited leading financial research institu-

tions from around the world to produce sector-specific reports that would:

1. Identify the specific environmental and social issues that arelikely to be material for company competitiveness and reputa-tion in that particular industry

2. Identify and to the extent possible quantify their potential

impact on stock price

The outcomes in terms of sector specific reports and insights with

regard to the relevance of ESG issues will be summarised in a sepa-

rate report and presented at the U.N. Global Compact Leader Summit

in June 2004. Pending approval from the AMWG members, a second

invitation will be launched in Q3 2004. A wide range of financial

research institutions has responded to this call. The contributing insti-

tutions and the titles of their reports are noted below:

1. Deutsche Bank Global Equity Research: Beyond the Numbers Corporate Governance: Implication for Investors

2. Deutsche Securities South African Equity Research: NoEvidence to Link Share Ratings with Good CorporateCitizenship...Yet

3. NikkoCitigroup Japan Equity Strategy: EnvironmentalTechnologies Fuelling Zones of Growth

4. Goldman Sachs Global Energy: Introducing the GoldmanSachs Energy Environmental and Social Index

5. ABN AMRO Equities United Kingdom: Pharmaceuticals

6. West LB Equity Markets Pan-European Equities: Insurance andSustainability: Playing with Fire

7. Nomura Japanese Equity Markets: Corporate social responsi-bility (CSR) in the nonlife insurance sector

8. HSBC: European Utilities

9. UBS Global Equity Research: European Emissions TradingScheme Bonanza or Bust

10. Dresdner Kleinwort Wasserstein Europe / Equity: Utilities Emission trading Carbon Derby Part II: And theyre off

11. Dresdner Kleinwort Wasserstein UK / Europe / Equity :Transport Aviation emissions: Another cost to bear25


Who Cares Wins


42/58

Exhibit 17

Increasing integration of ESG factors in UK pension funds management

According to a recent study by the Association of British Insurers 16 ,

the knowledge of and interest in ESG aspects among pension trustees

is constantly increasing. The study cites a recent survey of 70 UK pen-

sion funds by the research organisation EIRIS. The picture that

emerges is of trustees concerned about ESG criteria, but relying large-

ly on fund managers to take the initiative.

Following an amendment to the Pensions Act which came into effect

in 2000, trustees are now required to include in their Statement of

Investment Principles (SIP) comment on the extent to which (if at all)

their investment decisions take account of social, environmental and eth-

ical issues. Research has shown that many trustees have responded

positively to this requirement. Almost 90 billion of pension funds UK

equity holdings are now subject to some form of socially responsible

investment policy, equivalent to almost a quarter of the sectors total UK

holdings. This figure is based on SIP statements. In practical terms, in

many cases this has not led to substantial change in investment practice.

Of the 70 responses to the EIRIS poll (mostly from the private sector),

90% said their investment strategy did take account of Social,

Environmental and Ethical (SEE) 17 factors. The survey also highlighted

the increasing activity of pension funds in integrating SEE aspects in

their management of funds:

59% of funds said they consider SRI experience and perform-ance when appointing or reappointing investment managers

54% of the funds pensions managers/trustees have receivedtraining on incorporating SEE issues into investment strategy

59% said they have asked their investment managers to consid-er the financial implications of SEE factors when assessing the

risk and returns of each company

11% undertake some form of screening and/or preferenceweighting in relation to SEE issues

87% say they exercise voting rights on SEE grounds.


17 Social, Environmental and Ethical (SEE) 26


Who Cares Wins


43/58

4. Integration in financial analysis

Until now, efforts to integrate ESG aspects in financial analysis havefocused on specific sectors, such as the energy, extractive, automo-

bile, utilities, pharmaceutical and chemical industries, which areperceived as being more exposed to theseaspects. Analysts in these sectors have startedto collect information, and to deepen theirunderstanding and analytical skills with regardto ESG issues. Their experience is invaluable inexpanding the scope to other industries.

Financial institutions have recently begun toconsider ESG factors in a more systematic wayacross all industries and across different assetclasses. Even though ESG aspects are particu-larly important for equity analysis, theimportance for other asset classes such asfixed-income, private equity and real estateinvestments also needs to be considered.

Because of their importance to global growth, emerging mar-kets should receive particular consideration and ESG criteria willneed to be adapted to the specific situation inthese markets. Emerging countries willbecome increasingly important in terms ofdelivering sustained economic growth, ofenabling investors to diversify their portfoliosand in terms of their role in the context of sus-tainable development.

In order to improve the inclusion of ESG fac-tors in financial analysis it will often be

necessary to adapt current analytical modelsand tools. In particular, including qualitative information on com-petitive advantages of well-managed companies or on the impactof emerging risks must be improved.

We believe systematic evaluation of corporate

governance, environmentaland social responsibility through extra-financial

analysis providesa better view of investment

risks and opportunities.

Philippe LespinardChief Investment Officer

BNP Paribas AssetManagement

Environmental and related social issuesin transactions are

becoming an integral part of our risk analysis

David BushnellHead of Risk ManagementCitigroup Global Corporate

and Investment Bank

27


Who Cares Wins


44/58

Recommendations:

l. Building on the existing awareness for ESG factors inexposed industries, financial analysts should expand

their understanding and analysis of these factors to other industries.

m. While supporting a thoughtful and creative process led by the analysts, we encourage financial institutions to explore ways to more systematically

integrate ESG issues in research. We encourage analysts to prioritise ESG issues on the basis of their potential impact on financial value and on a sector- by-sector basis. In each case the time scale over which issues might become relevant should be

analysed. Financial institutions should support the work of analysts with the necessary training,resources and tools.

n. Financial analysts should improve their understanding and integration of ESG issues in emerging markets research. They should take into account that criteria and methodologies must be adapted to the specific situation in emerging countries.

o. We invite financial institutions to expand the scope of ESG integration in research to other asset classes impacted by ESG factors, beyond equity.

p. We encourage analysts to further advance the development of valuation methodologies to better deal with qualitative information and uncertain impacts related to ESG issues. Specific techniques such as

scenario models, options pricing, etc., might prove useful in this context.

28


Who Cares Wins


45/58

29


Who Cares Wins

Exhibit 18

Examples of traditional and emerging ESG issues in dif-ferent sectors 18

Sector Traditional issue Emerging issue

Oil and gas Oil spills Socio-economic impacts CO2 emissions Government relations

and revenue sharing

Food industry Food safety Functional food regulation Brand and Nutritional value, especially in

reputation risk low-income diets

Pharmaceuticals Bio-safety Role re. national Animal welfare healthcare systems

Patent rights Environmental effects

of compounds

Automotive Safety requirements Mobility and socio-economic CO2 emissions impacts

Low emission regulations

18 Arthur D. Little and Business in the Community, Speaking the Same Language, 2003


46/58

30


Who Cares Wins

Exhibit 19

Taking into account the specific situation of emergingcountries

ESG issues are as important, and perhaps more important, in emerg-

ing market investment analysis in terms of financial materiality,

reputation management and good corporate citizenship as com-

pared to developed market analysis. This is because:

Regulation and enforcement are typically weak

Many of the worlds most economically important non-renew-able and renewable resources are located in developingcountries

Developing countries are also where the worlds most pressingenvironmental and social problems are caused and/or felt

Companies are in general more involved in shaping marketsand more exposed to government and societal expectations.

In this context it will be important to support capacity building for

better management of ESG issues by local companies and financial

markets, bearing in mind that this process will take time and will

need to take into account local cultural and economic realities. U.N.

or investor-led initiatives could play an important role in this field. An

example of such an initiative is the Hong-Kong based Association for

Sustainable & Responsible Investment in Asia (ASRIA).


47/58

5. Transparency and disclosure

Efforts by financial markets to improve the integration of ESGfactors in financial analysis and investment will not be successful

without adequate disclosure on these matters by companies.Transparency and disclosure are therefore crucial elements ofbetter functioning markets in this field.

The quantity and quality of companies reportingon ESG issues has increased rapidly in recent years.In its international survey of corporate sustainabilityreporting, KPMG concludes that reporting in thisarea is becoming mainstream with 45% of globalFortune 250 companies regularly disclosing relatedinformation compared to 35% in 1999 19 .

Fund managers and analysts, on the other hand,when asked if they are satisfied with the informa-tion they receive from companies answer No by awide majority of over 55% 20 . Something is clearly not working inthe communication between companies and financial markets onthese issues. Analysts confirm that a lot of information is available,but that it is not presented in a consistent and meaningful way andits relevance for the core business of the company is not explained.That said, it is also true that analysts often do not show much inter-est in this type of information.

This situation must be unlocked. We welcome the recommen-dations by the U.N. Global Compact which cover four areas ofgood communications practice with investors:

Communicate a leadership commitment toward values-basedmanagement

Emphasise the social contribution of the core business

These issues areraised more often and

in an increasingly knowledgeable and

professional manner at investor meetings.

Anthony TraharCEO

Anglo American Plc.

31


Who Cares Wins

19 KPMG International Survey of Corporate Sustainability Reporting 2002, The Netherlands, 2002.

20 CSR Europe, Deloitte, Euronext: Investing in Responsible Business. The 2003 survey of European fund managers, financial analysts and investor relations officers.


48/58

Recommendations:

q. We invite companies to take a leadership role by implementing ESG principles and policies and to provide

information and reports on ESG issues in a more consistent and standardised format, and to explain their relevance to value creation. Companies are invited to identify and communicate key challenges and drivers and prioritise ESG issues accordingly. We believe that

this information is best conveyed to financial markets through normal Investor Relation communications channels. We also encourage, when relevant, an explicit mention in the Annual Report of companies.

r. Companies are encouraged to facilitate a constructive dialogue with asset managers and analysts and

32


Who Cares Wins

Develop a credible and measurable business case for corpo-rate citizenship

Communicate change in a consistent and coherent manner

We also believe that regulatory frameworks requiring a mini-

mum degree of disclosure and accountability on ESG issues wouldimprove the availability and comparability of data, and thereforesupport integration in financial analysis. Stock exchanges, forinstance, could include ESG criteria in listing particulars for com-panies. Both voluntary and market-friendly regulatory approachesare needed to improve disclosure. Both should be flexible enoughto allow for diversity of approaches and providers, rather than rely-ing on rigid prescriptions.

We are also convinced that international and national accountingbodies and rating agencies are key players in developing betterstandards and achieving a better quality and availability of usefulESG information. Non-governmental organisations (NGOs) can alsocontribute to better transparency by providing objective ESG infor-mation on companies to the public and the financial community.


49/58

accept both positive and more critical outcomes of

ESG analyses.

s. Analysts should improve their understanding of the

link between ESG performance and value creationand more actively communicate with companies on

these issues.

t. We believe that regulatory frameworks should require a minimum degree of disclosure and account-

ability on ESG issues, but rely on market-drivenvoluntary initiatives to formulate detailed standards.

u. We encourage financial analysts to participate more actively in ongoing voluntary initiatives, such as the

Global Reporting Initiative, and help shape a reporting framework that responds to their needs. We also encourage the Global Reporting Initiative to closely cooperate with national and international financial

analysts associations.

v. We encourage stock exchanges to include ESG criteria in listing particulars for companies, because this will ensure a minimum degree of disclosure across

all listed companies. As a first step, stock exchanges could communicate to listed companies the growing importance of ESG issues. Similarly, other self-regulatory organizations (e.g. NASD, FSA), professional

organizations (e.g. AIMR, EFFAS), accounting standard-setting bodies (e.g. FASB, IASB), public accounting entities, rating agencies and index providers should all establish consistent ESG standards and frameworks.

33


Who Cares Wins


50/58

34


Who Cares Wins

Exhibit 20

Investor initiatives for better disclosure in the pharma-ceutical and extractive industries 21

In March 2003, 12 institutional investors issued a framework for phar-

maceutical companies to improve disclosure in annual/social reports

in the context of the public health crisis in emerging markets, with

a focus on issues relating to access to patented medicines. The

investors involved in the initiative believe that the sectors response

to the crisis could impact shareholder value in the long term and

therefore want to enhance their understanding of how companies are

addressing this issue.

In May 2003, a group of institutional investors representing

US$ 7 trillion issued a statement in support of the Extractive Industries

Transparency Initiative (EITI). Launched in September 2002 by United

Kingdom Prime Minister Tony Blair, with the support of leading min-

ing and energy companies, as well as NGOs, the EITI aims to increase

transparency of payments made by extractive sector companies to

governments and government-linked entities. The statement supports

a wider use of EITI and commends the efforts made by companies and

governments already engaged in the initiative, and calls on the

engagement of new companies, as well as inviting other investors to

join the statement.



51/58

35


Who Cares Wins

Exhibit 21

Case-study on disclosure in the US pulp and paper industry

One key barrier to the integration of ESG issues into mainstream finan-

cial analysis continues to be the poor quality and limited quantity of

financially relevant environmental information disclosed by companies.

Though disclosure is generally improving, there are important

gaps in the information that companies make available to financial

analysts. A review of 13 leading, publicly listed companies in the US

pulp and paper industry found that while impending ESG issues could

materially affect capital expenditures and future earnings, few com-

panies adequately disclosed the financial risks or competitive

implications of these ESG issues to their shareholders 22 . Similarly, in

2002, of 16 leading oil and gas companies analyzed by the World

Resources Institute, 11 failed to mention climate change as a business

risk in their annual reports. This, despite the fact that climate change

is widely recognized by oil and gas managers as being a critical issue

for the industry.

Not merely an inconvenience, this lack of disclosure makes it

impossible for investors to value companies accurately. Indeed, failure

to disclose financially material environmental information may con-

stitute a breach of securities law.

22 World Resources Institute, Pure Profit: The Financial Implications ofEnvironmental Performance, March 2000


52/58

36


Who Cares Wins

Exhibit 22

Stock exchanges convene to discuss corporate citizenship

On 15 March 2004, the Global Compact convened a meeting with sen-

ior representatives of the worlds exchanges and principal federations

at United Nations Headquarters in New York. The meeting, requested

by Secretary-General Kofi Annan, invited the exchanges to explore

potential partnership and collaboration with the Global Compact.

Many participants recognized that advancing the Global Compact

and the concept of responsible corporate citizenship based on uni-

versally accepted principles can help in building trust in societies,

which was also considered a key priority of the exchanges work.

At the meeting, Leanne Parsons, Chief Operating Officer of the JSE

Securities Exchange, described JSEs approach to corporate resp

who cares wins — connecting financial markets to a changing world (june 2004)

Documents